Stocks Tumble as Year’s Winning AI Bets Take a Hit

22:11Just say Alexa, play Bloomberg 1130. Well, a defense system that could defend the U.S. from the nuclear missile arsenals of Russia, China, and North Korea. It's the so-called Golden Dome announced just days into President Trump's second administration. The president has said the project will cost about$175 billion, and it'll be completed by the end of his term in 2029. But defense experts say those targets are unrealistic. A Bloomberg analysis found the final price tag could reach many multiples of that. And Carol, the tech not even confirmed that could actually work.

22:47Carol Massar:You know, I think what I find fascinating reminds me of like President Reagan and his Star Wars. Which we talked about in like grade school. Yes. It's not working. Right. Exactly. Although you kind of understood where he's going, but this certainly feels like and is more of a reality. Well, it's a Bloomberg big take and just a fantastic read. Joining us now is Santa Paschenker, Bloomberg News space reporter. Also, Wayne Sanders joins us. He's Bloomberg News, Bloomberg Intelligence Senior Defense Analyst. Santa joins us from Washington, D.C. Wayne joins us from Maryland. First, Santa, I want to start with you.

23:20Carol said the whole concept reminds her of Star Wars during the Reagan administration. But explain exactly how the Golden Dome would work. The satellites, the missiles, what would happen? Yeah, totally. So the Golden Dome is intended to be a multi-layered missile defense shield. So the way it would work is in the case of an attack from an adversary like Russia, North Korea, or China, a nuclear missile would first encounter a space-based layer of defense, which would include space-based missile interceptors. And that technology doesn't yet exist. But those are intended, those which were outlined in President Trump's executive order, as a requirement of the Golden Dome, would attempt to counter the missile at the very first stage, which is in space.

24:11And then if they make it past that space-based layer of defense, there would be other layers of defense, including the high atmosphere and even on the ground, like using Patriot and Thad batteries to intercept different types of missiles that could be launched from adversaries. So it's really like... Go ahead. Sorry, I interrupted you. Oh, I was just going to say, it's really like there's a net on every single level that is hoping to engage those missiles and destroy them before they land. Cool. We're going to get to the astronomical price tag in just a minute with this and also how realistic a solution such as this is.

24:46But first, I want to bring in Wayne Sanders. He's Bloomberg Intelligence Senior Defense Analyst. He joins us from Maryland. Wayne, as Santa and the team write in the piece up to now, the strategy to prevent annihilation of the United States has really depended on deterrence. This idea of mutually assured destruction and nuclear deterrence. Why do we need to make a change there? Well, I think the first really important piece is there is a lot that actually goes on within missile defense, ballistic missile defense within the United States that we already have. And one of the biggest precursors to Golden Dome was really looking at it and saying we have a lot of capability that is not interoperable.

25:32We have capabilities like Lockheed's Aegis Defense for the Navy. We've got ballistic missile defensive Guam, and we have the THAAD batteries that that sauna brings up as well as as well as Patriot and PAC-3 interceptors. We have a lot of capability, but what we don't have is the ability to see all of those to include the sensor layer that she brings up as well. We have tracking layers from ground as well as in the air, as well as in space. And so long range determined discrimination radars, next generation overhead, persistent, you know, all these different things. But what they don't do is all talk to the senior military leaders at the same time and say, I can see a launch coming from country X.

26:12It's going to take X amount of time to get to to get to the U.S. or to one of our allies. You know, you can shoot a hypersonic missile from mainland China and reach South Korea and Japan in six to 11 minutes. You can reach Australia in 15 minutes. That's that is a very quick turnaround in terms of trying to make a decision. And if you're only picking it up based off of one commander who happens to be in a submarine or a surface vessel that sees this, they've got to get that to the National Military Command Authority to make those decisions a lot faster.

26:45Carol Massar:Yeah, I think about, you know, Wayne, all of the layers of this. And, yes, there's missiles. And, you know, I go back to my college days and we were talking about ICBMs and, you know, deterrence and, you know, how that kind of changed warfare. But but what I guess what I'm curious about, you know, throwing drones into this and this is a whole other kind of lower level. I just think about what's needed to protect ourselves against that, the cost, the implications. How does that even just kind of complicate or add to the cost of all of this? Well, absolutely. You know, the layer of defense that SANA brings up, absolutely.

27:23100%. You have exo-atmospheric. You think about those ICBM threats. You think about things that can go into space and come back down. We have to be able to reach those. But you also then have the drone swarm fight that is also out there, right? So part of the Pentagon's Replicator 1.0 and Replicator 2.0 initiative is being able to counter drones and then be able to add to our own arsenal. So when you look at a billion plus dollars for drone development and counter UAS for the 2026 NDAA, a lot of that in the Golden Dome piece is really looking at high-powered microwaves. It's looking at high-energy laser technologies and, you know, companies that are out there right now building these things so they can counter that threat so that the strategic-level capabilities, the expensive PAC-3s, right,$4 to$6 million to fire those Patriot PAC-3 interceptors, you don't want to do that against a$30 ,000 drone.

28:18So being able to put all these pieces together and make sure that you can identify the capability and shoot it down with the right thing.

28:26Carol Massar:So I'm going to come back in on this. All I can think about is the price tag. You know, I've been to countries like Costa Rica where I think they spend nothing on military and what they can do in terms of education and health care and just different things. Yeah, it's just so talk to us about the cost, because I think what was it back in October? $175 billion is what the president said the project would cost. Right. Go ahead. No, but what I was going to say is that we already have a budget deficit that's topping and logging a$1.8 trillion mark. What would something like, like Tim put out a number, what the president thinks, what did you guys find out?

29:01Carol Massar:And can we afford to do this? I sound like my husband. Can we afford to do this? Yeah, totally. So when we kind of estimated how much it would cost to defend against an all out attack from the combined nuclear arsenals of Russia, China and North Korea. So think worst case scenario. The defense systems that we would need to really successfully counter that would cost about one point one trillion dollars. So way more than what Trump is claiming as 175 billion. if you're adhering to the requirements that he's outlining in the executive order, which is that, you know, this Golden Dome will protect against any foreign aerial attack.

29:39And then, but, you know, a Golden Dome that protects a little bit less could be built more cheaply, even though that's not maybe exactly what he said in the executive order. So we also calculated the cost of one that a Golden Dome that could protect against an all out attack from just one adversary like Russia. And we found that even that was still$844 billion. And a lot of these costs are just from procuring the systems, and a lot of them don't even exist yet. Like I mentioned, space-based interceptors is something that President Trump specifically states in the executive order needs to be part of this Golden Dome, and that technology doesn't even exist yet.

30:17So you would need a lot of research and development money as well. And we didn't even include that in our analysis. So I think it's pretty well known that that's a potentially underestimate of what this would actually cost if it is built to what he's stating in the executive order. Then how do you get that number, Sana, up to$1.1 trillion, this maximum risk scenario estimate? What does that calculate? it? Yeah. So what we did is we kind of so the nuclear arsenal of Russia, North Korea and China, those numbers of what missiles they have have been published by the Defense Intelligence Agency. So what we did was we did analysis to kind of find out how many defense systems we would need to really protect against all of these missiles coming at the United States at once.

31:04And, you know, we did that using a combination of Pentagon documents, prototype contracts, think tank estimates. And so we kind of compiled all these costs of all the defense systems, as well as the quantity of the defense systems needed to come up with this final number of$1.1 trillion.

31:22Carol Massar:All right. So Wayne, we live in a world where we talk a lot about AI and tech spend, and you've got to do upgrades on things. This isn't a case of we build this dome and set it and forget it, right? Or help me out here. Are we going to constantly having to be doing kind of upgrades, improvements, and so on? No, they're definitely going to require that. I think a lot of the AI integrators that you're already seeing, right, even with one of the Golden Dome pieces early on was Palantir with SpaceX and saying, hey, we want to be able to play in this space as well during the bidding portion for Golden Dome.

31:59You're going to end up having to do that. So a lot of this also includes like cybersecurity, making sure that you have the open system architecture necessary to be able to provide the upgrades. But like Sana said, too, is you also have to build the scalability. You're still going to come down to industrials. You have to build the satellites capable of doing this. You have to build the radars and the sensors to be able to meet that. And then you have to get to the interceptors point to be able to do that, right? You and I, we've had this conversation before. If you even take just the PAC-3 interceptors, right, that are using the Patriot system.

32:33Lockheed, you know, they were at 550 per year that they build. And then they're up to 750 that they're hoping for 2026, 27. They're adding additional lines. So they're doing a great job of actually being able to reach some of the demand. But those are for ground-based Patriot systems. If you're now all of a sudden trying to add in, I need to create an interceptor capability, a space-based interceptor that's going to be in orbit, that's going to go on these satellites, you've got to build to that capacity as well. And then add on to all of that piece, right, is that AI integration. Every time that there is something new that China or Russia does, we have to be able to make sure that we can defend that in the cybersecurity arena for the satellite platforms themselves.

33:16Wayne, we got to run. But just yes or no. Does this happen by the end of President Trump's term? No. Phase one can happen where interoperability of all their stuff can happen. Space, space, no. All right. I thought you were going to ask if the ballroom was going to get done. No, that's easier. That's not in space.

33:32Carol Massar:Um, Sana Pashankar and of course our Wayne Sanders. Thank you so much. Incredible story. Stay with us. More from Bloomberg Businessweek Daily coming up after this.

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37:00Yeah, Wealthfront started trading. It's the robo-advisor fintech company. Oh my gosh, yeah. I think UBS was supposed to buy it a few years ago. It's now trading just up about 3.3%. Valued, though, at$2.1 billion.

37:14Carol Massar:Wow. Making its debut today. I didn't see that. What's it doing? It's up 3.2%. Oh, interesting. It's not too late to add to one of your gainers. Maybe do an honorable mention at the end. I am so overwhelmed with gainers today, courtesy of you. Well, he's not a robo-advisor. He's a real person. We're talking about Andrew Cry. He's chief investment officer at Crescent Grove Advisors. The firm has about$5 billion in assets under management. Andrew joins us from Milwaukee this afternoon. Andrew, good to have you on the program. Last time you were here with us in the studio, a lot has happened since then.

37:47And a lot of questions, I think, too, as we just heard from Jordan and from Charlie, about where we are or are not when it comes to AI spend and an AI bubble. How are you looking at that in the context of the trade? Yeah, everybody wants to know where this AI theme is going. And also, great to be with you. So I think from our perspective, the risk going forward is that so much is in the price at this point, right? You've got such a sort of perfect outlook that's being priced into these companies at this point. And in particular, take a company like Oracle, where you're seeing more debt funding come into play, as opposed to some of the other MAG7 members that are largely funding their spending out of free cash flow.

38:33You know, you introduced sort of a unique element to that specific stock. But ultimately, you know, people are saying, can they deliver on the promise, the productivity gains, the, you know, ultimately the earnings, the return on invested capital, all this money that's being sunk into this theme? Can we see that produce something of value? And if not, then I think these valuations are probably a little bit hard to justify. So it's data point by data point, sort of case by case as you look at it. But that's certainly top of mind as you move into 2026.

39:09Carol Massar:When clients come to you, and I know it's long term and it's about, you know. And they say, I want to go back in time. I want you to put all my money at NVIDIA 10 years ago. No, no, no. No, no, no. Yeah, yeah, exactly. Right. Or buy Bitcoin 10 years ago. Where do they want to put money? And I understand everybody's got their own individual goals. And a lot of it's about, you know, maintaining wealth, not only growing it. But so I'm just curious, what is it that they ask you most about when it comes to different trends, narratives, investment plays? I think right now what we've heard a lot from clients is just this uncomfortable sense about this rally, you know, since since Liberation Day, kind of off the April lows that it just feels uncomfortable for some reason.

39:53You get a lot of talk about all time highs and do we pull back with our equity allocations. And certainly, we're not opposed to taking some chips off the table. And in particular, thinking about where do we rotate to find relative value across markets? And I think one of the big themes as we look out into next year and talk about within equities in particular that have done so well, sort of the growthy side of equities, these mega cap tech names, taking chips off the table there, which would be the first order effects of AI and the theme that we're talking about here with this outsized performance that we've seen from the MAG7 and related names.

40:26think about what's the next play. What's the second order, the third order effect here? Yeah, I was just going to say from that perspective, we think it's the diffusion of AI through the economy into more of these legacy kind of old economy type names. So that's something that we're positing to clients is, OK, we appreciate the fact that there's this sort of momentum play in markets and you're a little bit skittish about levels here in valuations. Let's think about areas where we can rotate into things that offer better value right now in markets while maintaining some of your exposure in aggregate.

40:59Carol Massar:Like healthcare or what? Yeah, I think healthcare, industrials, you know, sort of these manufacturing segments of the economy. Again, just these old line areas of the economy, even business services, more traditional businesses like that. And we look at it not only from the public market side of things, but the private market side of things. So we spent a lot of time looking at, you know, private equity or certainly venture capital growth equity. But if you think about private equity in the way that they can touch these traditional businesses, small, medium-sized businesses, apply some AI in a thoughtful, novel way, and drive real productivity gains.

41:33And if you can find a manager that can do that in a really systematic fashion and has some sort of edge in terms of the way that they're deploying that throughout their portfolio, we think that's a really interesting complement to what you're seeing on the public market side as well. Well, let's go back to public markets and just think about geographies for a second. Where do you think this happens in terms of AI spilling out into the non-AI companies over the next couple of years? Does it happen in the U.S. or would investors be good to look outside of the U.S.? Yeah, I think it happens globally.

42:05And this weaves into another theme that we're seeing and expecting to continue to play out, which is really deglobalization. But re-regionalization, I suppose, is the way we would frame that in the sense that Europe gets more Europe-centric in the way that it thinks about maybe even its own AI technologies and sort of the sovereignty around its AI capabilities. But we think AI will be a universal technology that gets deployed across the world in different capacities. And then that really ties back into this relative value theme as well, right, where you're looking at markets ex-US that are trading at much more reasonable valuation starting points but continue to have a pretty good catalyst in terms of fiscal spending picking up.

42:47Defense spending, certainly within Europe, is a sort of poster child there. You've got loose fiscal policy in Japan. You've got China, which looks set to continue to be providing stimulus to its markets. So you've seen this positive revision in earnings expectations. If you look at the IFA, if you look at emerging markets, indices, we think that then is kind of the relative value rotation theme for us, where you come out of some of these mega cap tech names that have done so well, look at other areas of the market that are poised to sort of accelerate their earnings growth into 2026.

43:21Carol Massar:Biggest risk in the new year, just quickly, just got about 30 seconds. Yeah, it's inflation to us. If inflation stays stubbornly high, and we're already seeing the 10-year today is ticking back up towards 4.2%. But if you see inflation expectations really re-rating to the upside, you see that 10-year move back towards 5%, we think that's the big concern, then all of the knock-on effects that come alongside sort of longer-duration securities repricing as a function of elevated inflation expectations. So that's what we're watching really, really closely into next year. Andrew Krai, thanks so much for joining us.

43:57Chief Investment Officer at Crescent Grove Advisors. Hopefully next time we see you back here in New York. This is the Bloomberg Business Week Daily Podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live weekday afternoons from 2 to 5 p.m. Eastern on Bloomberg.com, the iHeartRadio app, TuneIn, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.

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46:09Carol Massar:If you follow markets, you know the value of long-term thinking. You plan, you diversify, you prepare for volatility. But even the best strategies can't prevent every bad day. For more than 75 years, Cincinnati Insurance has helped individuals and businesses navigate tough moments with expertise, personal attention, and independent agents who focus on relationships, not transactions. The Cincinnati Insurance Companies. Let them make your bad day better. Find an agent at CINFIN.com.